J.P. Morgan Offers Updated ‘Guide to Retirement’

A wide range of factors can cause people to retire earlier
than expected, new J.P. Morgan research finds, but U.S. workers rarely plan for
an earlier-than-anticipated retirement, and most overestimate their ability to
work beyond age 62.

This overestimation can be hugely damaging to individuals’
retirement prospects, according to the 2015 “Guide to Retirement” report from
J.P. Morgan Asset Management (JPAM). Even a successful retirement saving effort
can be derailed by an unanticipated early retirement, the report finds, so it’s
critical for people to perform scenario testing to assess their risks. They should also proactively identify ways to mitigate the damage of an early retirement, perhaps by taking advantage of insurance products or supplemental retirement accounts.

The research finds about three in four (73%) employed
Americans plan to work beyond age 65—but only 27% of those surveyed by JPAM were
actually able to continue working beyond 65. The research shows many are forced
to retire earlier than expected or desired because of a disability or chronic
health problem.

But even with “work longevity” lower than predicted, the
labor participation rate for older Americans is steadily climbing. JPAM
observes that in 1992, just 21% of people ages 65 to 69 remained employed in the civilian labor force, whereas by 2022 the projected
figure shoots up to 38%. As of 2012, the workforce participation rate for this
age category was approximately 32%.

As explained by JPAM’s Katherine Roy, who serves as the firm’s
chief retirement strategist, and David Kelly, chief global strategist, expanding longevity partly underpins this figure. But Kelly is quick to
add that this increasing percentage of workforce participation is somewhat
misleading and does not necessarily represent greater wealth
generation opportunities for the typical individual in this age group.

“The increasing workforce percentage is in large part
explained by the fact that this segment of the population will simply become so
much larger as the Baby Boomers age into it,” Kelly notes. “There will be more people
in the age category that are working, but working beyond age 65 is not a
strategy that can be relied upon. It is a phenomenon known in statistics as a ‘mix-shift’
effect. We are going to experience an absolutely huge mix-shift in terms of the
number of over-65 people during the next decade.”

Put another way, Kelly says, the absolute number of people
in the U.S. in the age 65 to 69 category is about 31 million, but in
2022 the number is projected to reach 46 million. This means the growth in the
over-65 population will occur much more rapidly than growth in the overall
population.

“In some ways, this actually spells real trouble
for retirees,” Kelly comments. “The price of medical services is already inflating
faster than any other consumer good besides education, and vastly increased demand
will not help the trend. On the other side, we see prolonged low interest rates
that are really unlike what earlier generations of retirees faced. This has significant
implications for portfolio strategy and risk outlook.”

“Another important fact that is directly tied into this
conversation is that still only about 2% of people wait until age 70 to start
drawing Social Security benefits,” Roy says. “This is despite all the positive
messaging and increased understanding that it can be a huge financial benefit to
defer Social Security payments beyond 62 or 65. It shows that people aren’t
necessarily living up to their own expectations about how long they’ll be able
to work. Many of these decisions, frankly, are made for you.”

Various factors cause people to retire earlier than expected,
the research continues, including health problems, employability issues and family
obligations. The research identifies the median U.S. actual retirement age at
62, whereas the median anticipated retirement date remains 65. This conflicting
thinking leads to poor real-world decisionmaking in a variety of areas, JPAM
warns.

Kelly notes that most economic forecasters anticipate an annual
average U.S. GDP growth of only about 2% over the next decade and a half.

“Personally, I feel we will be lucky to get a 2% growth rate
in the U.S. in the medium term,” Kelly adds. “The clear message from this is
that both pre-retirees and retirees will have to look globally to build
reliable sources of returns and income. It probably also argues for greater
equity exposure all along the retirement savings lifecycle. There is a confluence of factors in the market right now that really highlights the longevity risk many people face.”

Kelly feels diversification will remain an often-cited and critically important principle in navigating this new normal for U.S. workers and retirees. Specifically in the
area of retirement plan administration, he feels sponsors and advisers will increasingly come
to understand asset-allocations solutions are the best option for the biggest
number of retirement savers. He adds that auto-enrollment into a pre-diversified
and regularly rebalanced qualified default investment alternative (QDIA) is “probably
the most important feature a plan sponsor can adopt, given everything we are discussing today.”

“Overcoming participant inertia and emotion is the most
important thing,” he continues. “We have one slide in the new report that shows
just how poorly emotional investors do. It shows six of the best 10 trading
days for the S&P 500 between 1995 and the end of 2014 occurred within two
weeks of the 10 worst days.”

Kelly explains that, for a $10,000 initial investment,
missing these 10 best days of equity returns would mean the difference between
generating $65,450 over the 10-year time period or $32,650. Missing the 20
best days drops the return on $10,000 to $20,350, and missing the best 30 days would
return just $13,440.

“I don’t know if I can’t think of a clearer explanation for
why trying to time the markets and reacting to the financial news headlines is
almost guaranteed to make you do worse, as a retirement investor,” he concludes. “I think I can speak for
plan advisers and sponsors when I say it is really remarkable, the amount of
time we have to spend actually convincing long-term investors to behave like
long-term investors. If we can prevent people from trying to time the markets,
we’ll do that much more to improve retirement readiness.”